Proposed super fund borrowing changes come “out of nowhere”

SMSF trustees could avoid dealing with a whole lot of red tape if sudden proposed changes to unwinding super fund borrowing are pushed through, but they must strategic.

This is according to Peter Townsend, principal and Townsends Business and Corporate Lawyers.

He spoke to Wealth Professional about a draft determination issued by the Australian Taxation Office (ATO) last December that came seemingly “out of nowhere” and deals with SMSFs and the in-house asset exclusion of limited recourse borrowing arrangements.

The draft called for submissions to be lodged by the end of January 2014.

It related to assets purchased by an SMSF using a limited recourse borrowing arrangement, and definitively addressed the issue of what happens with the asset once the loan has been repaid.

Until now, it was a requirement that the asset had to be transferred from the holding trustee back to the fund trustee.

“It had to be transferred because the super fund interest was [classified] an in-house asset and therefore had to comply with the in-house rules, which most funds can’t,” said Townsend.

However the draft determination proposes that when the loan is repaid, the interest in the holding trust will not have to become an in-house asset and the legal title is therefore able to remain with the holding trustee.

If finalised, this change of legislation will be retrospective to 24 September 2007.

Townsend said if the draft becomes legislation it would mean that trustees will now have a choice to make between leaving the asset in the holding trust, or transferring it back to the trustee.

Advisers will need to look at the future plans for the asset, do the maths, and help their clients to make the best strategic choice, he said.

By keeping the asset in the holding trust the trustee must pay a series of ongoing costs such as ASICS annual fee, and prepare financial statements.

Transferring the asset on the other hand can be “a bit of a nuisance” because it involves a lot of red tape, and a modest one-off cost, said Townsend.

“If you said it’s going to cost you roughly $450 a year [to leave it in the trust] then after about five years you cross the break even line [of the cost of transfer],” he said. “But if you’re going to sell it in the next five years then you’d keep it in the trust. It’s essentially a numbers game: for short term holdings, leave it where it is, but for longer term it’s cheaper to do the transfer.”